Question

Our latest development included the refurbishment and conversion into apartments of a listed building under a JCT Contract.  During these works damage was caused by water escaping from an existing pipe. The contract documents made the contractor responsible for all protection and for damage caused to any property, but they are arguing that this should be the subject of an insurance claim. Is this right?

Answer

Clause 6 of the JCT standard form building contract, without quantities, 2011 edition, provides that the contractor is responsible for any damage caused by the building works to "any property real or personal", requires the contractor to indemnify the employer against any such damage, and to maintain insurance cover against these risks.   However, damage to the "Works" is excluded from this.

As work to an existing building, your project was insured under Option C of Schedule 3 to the JCT contract.  This means that you took out insurance, in the joint names of yourselves and the contractor, which covered the existing structure and their contents against the "Specified Perils" and the "Works" against "All Risks". 

"All Risks" under the JCT Contract means any physical damage to the work executed and site materials, excluding wear and tear and inherently defective work.  In contrast, the "Specified Perils" cover defined risks, including fire, storm, flood, earthquake and the escape of water from any pipe, tank or apparatus.

These distinctions mean that it is sometimes necessary to consider carefully whether the property that has been damaged is part of the "Works" or of the "existing structure".  If the former, then the "All Risks" insurance maintained by the employer will cover any physical damage, regardless of cause, subject only to the exclusion of wear and tear and inherently defective work.  

On the other hand, if the damage is to the "existing structure", the employer's insurance will only cover the damage if it was caused by the "Specified Perils".  If it was some other damage, but caused by the carrying out of the works, the contractor will be liable for it under clause 6, and it is the contractor's insurance which will apply.

Damage caused by the escape of water from any tank, pipe or apparatus is within the definition of both "Specified Perils" and "all risks", and it is the joint names policy that you have taken out under Option C of Schedule 3 that will cover all damage to your building caused by the water escape.     

Schedule 3 provides that where such damage occurs, the employer is entitled to receive all insurance payouts, and the cost of the necessary remedial work is treated as a variation, entitling the contractor to receive additional payment: the intention is that the cost of this should be covered by the insurance payout. 

The JCT Contract also provides, as an option, that where it is "just and equitable", the occurrence of damage to the existing structures will justify the termination of the contract by either party.   It is very unlikely that this would be the case with your water damage, as this provision is intended to cover very serious damage, such as a disastrous fire.

Before any work commences, its always good practice to prepare and agree a schedule of condition with the contractor.  This should record the condition of the existing structure, should contain indexed photographs, and should identify any existing defects or damage.  The existence of such a schedule will help minimise any arguments over responsibility for damage, and will also be very useful in dealing with the insurers.

This article was written by David Johnson and originally appeared in the Professional Housebuilder & Developer magazine in April 2015.